The floating-rate trap

A floating-rate loan is one whose interest rate moves with the market instead of being fixed for the term. When rates are low and stable, it looks like the smart, cheap choice, and for years it was. Then rates rise, the loan’s cost rises with them, and the same financing that boosted the deal’s returns on the way in becomes the thing that drains its cash and, in the worst cases, triggers a capital call or a default. This is not a hypothetical. It is the defining trouble of a large cohort of deals financed in the low-rate years and living through the higher-rate ones.

The floating rate did not change the property. It changed the payment, and the payment is what the deal actually has to survive.

Why the trap closes quietly

Watch what a rate move does to debt service. A $10 million interest-only loan at 4 percent costs about $33,000 a month. The same loan at 6.5 percent costs about $54,000 a month, roughly $250,000 more per year, and none of that extra cost bought anything: the property is the same, the rents are the same, but a quarter million dollars a year that used to be distributable cash flow, or reserve, now goes to the lender. On a deal underwritten with thin margins, that swing alone can turn positive cash flow negative. The distributions stop, the reserves drain, and eventually the sponsor is choosing between a capital call and a default, which is how a rate move most sponsors did not control becomes the capital-call conversation covered earlier in this section.

The reason this cohort of deals is in trouble now is timing. A great many syndications took floating-rate or short-term debt when money was cheap, on the assumption that rates would stay low or fall. When rates instead rose sharply and stayed elevated, those assumptions collapsed, and deals that penciled beautifully at origination found their entire margin consumed by debt service. As of 2026, this is a widespread condition, not an isolated misfortune.

Rate caps, and their expiration

Many floating-rate deals bought a rate cap, an instrument that limits how high the interest rate can go, precisely to guard against this. The trap inside the trap is that rate caps expire, usually well before the loan does, and renewing a cap after rates have risen is enormously more expensive than the original, sometimes many multiples. A deal that looked protected can find its cap lapsing into a high-rate market, with the renewal cost itself becoming a cash drain or a reason for a capital call. A rate cap is real protection, but it is temporary protection, and its expiration date is one of the most important and least-read dates in the deal.

The structuring consequence

For the investor, the floating-rate question is one of the sharpest pieces of pre-wire diligence, and it connects directly to the stress-testing covered in underwriting: is the debt fixed or floating, if floating is there a rate cap, when does the cap expire, and what does the deal look like if rates are high when it does. A deal on long-term fixed-rate debt is largely immune to this trouble; a deal on short-term floating debt with a cap expiring into an uncertain market is exposed to it completely, no matter how good the property is. For the sponsor, floating-rate debt is a legitimate tool that lowers cost and preserves flexibility, but taking it without a stress-tested plan for a rate rise, and without reserving for a cap renewal, is the specific decision that turns a financing choice into the trap. The property did not fail. The payment did.